Adelphia Communications moved to cut its ties with its struggling telecommunications subsidiary, Adelphia Business Solutions. Adelphia said Friday that its board authorized the spin-off of its 79% stake in the subsidiary, which has been a cash drain. Adelphia has had to fund the competitive local exchange carrier (CLEC) in the current dry spell in the capital markets for telecommunications companies.
The move was one of several financial transactions Adelphia announced intended to reduce the company's debt ratios.
In addition to the spin-off of its business solutions unit, which provides local, long-distance, high-speed data and Internet services to businesses, Adelphia said it sold 30 million shares of its Class A common stock at $21.50 each, and closed a $300 million mandatory convertible debt offering, for total net proceeds of $916 million. Through a private placement, Adelphia's controlling shareholder, the Rigas family, purchased an additional 7.5 million Class B shares and $50 million of the convertible notes.
While the shareholder dilution from the stock sale helped drive Adelphia shares down 10% Friday, to $20.98, the company also reduced its net debt by about $1 billion, which could eventually provide a catalyst for the stock, even though the company reported a wider-than-expected third-quarter loss. Adelphia's stock has fallen about 30% this year. Those actions, along with noncore cable system sales that Adelphia expects to close within six months, should reduce the company's debt to EBITDA ratio to 6.5 times, from 7.65 times.
The spin-off of the telecom unit, known as ABIZ, represents a reversal for Adelphia, which had been trying to secure other sources of financing.
In August, Adelphia told the investment community that it expected to have a bank deal in place for ABIZ before the company reported its third-quarter earnings. That deal is now dead, and Adelphia is going forward with a new plan that calls for the spin-off by the end of March. After the spin, the Rigas family, Adelphia's controlling shareholder, will own between 25% and 27% of ABIZ.
In connection with the spin-off, Adelphia will pledge $100 million in additional credit support for ABIZ as it seeks other sources of funding. That funding should last ABIZ into the middle of next year, said Tim Rigas, Adelphia's CFO.
Questions on the company's earnings conference call mostly centered on ABIZ. Analysts and shareholders were clearly concerned over Adelphia's potential liabilities related to ABIZ should the telcom have to file for bankruptcy protection sometime before it secures additional financing. As of Sept. 30, ABIZ had approximately $5 million available under a bank-credit facility and approximately $19 million in cash on hand, including restricted cash. On Oct. 1, ABIZ received $80 million from Adelphia as part of its $140 million asset purchase from ABIZ. Adelphia has also guaranteed $500 million of ABIZ's senior credit line that is currently fully drawn.
Rigas said on the call the latest $100 million infusion should be the last. Making additional credit available to ABIZ ?seemed to be a minimal amount of risk for Adelphia Communications but would give ABIZ a fair amount of time to look for other sources of funding. The board was very clear that was the extent of the credit support we are willing to do.?
Despite an overall third-quarter net loss that was wider than analysts expected, Adelphia reported operating stats that were in line with analysts' expectations. Adelphia added 178,000 digital cable subscribers to end the quarter with almost 1.7 million. Rigas said he was confident Adelphia would ?blow through? its guidance of ending the year with 1.8 million digital subs. Adelphia added 60,000 data subscribers, ending the quarter with 315,104 and said it was comfortable with its year-end data guidance of 375,000.
Adelphia's net loss widened to $267.2 million, or $1.54 a share, up from $145.4 million, or $1.06 a share, last year. Analysts polled by First Call/Thomson Financial expected the company to report a net loss of $1.26 a share.
On a pro forma basis, total EBITDA from Adelphia's cable operations increased 11.2%, to $367.3 million, while revenue grew 11.3%, to $794.3 million, on the heels of Adelphia's second-quarter rate increase.
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